In Order to Fight Illegal cash Transaction, The Government should Immediately ban Rs.1000 and Rs.500 Currency Notes26/05/2011

Cash transactions are the most difficult ones to trace. And this is the most important reason behind the success of hawala or money laundering. Today, hawala is not only used to transfer funds from one place to other to avoid taxes, but is also widely used to fund a gamut of illegal activities ranging from a variety of small crimes to even terror funding.

Today, hawala is executed through multiple routes; be it through postal deliveries, rail transport, water transport or air transport. However, with the introduction of Rs.1000 currency notes, both the volume and value of hawala transactions have increased exponentially.

In order to reduce this illegal practice, it’s important for the government to immediately ban Rs.500 and Rs.1000 notes from normal circulation. Most of the countries across the world have 100 as their highest denominations in currency notes. Even the United States retired their currency notes of $500, $1000, $5000 and $10,000 way back in 1969 and today have $100 as their highest valued currency.

In the case of India where the inflation doesn’t allow things to be purchased at low price (in rupee terms), one does require higher value currency notes. But more than 90% of the people in India rarely use the bigger bills, and the 3-4% highly fortunate people rely on plastic money for high value transactions. Thus, banning of these notes will largely affect those who are into illegal trade or tax evasions. In any case, high volume transactions should never be undertaken through the cash route.

The government should concurrently give an event window for those with black money to deposit the same back with the tax authorities on payment of a pre-decided fine amount. While this may be seen as escapist, it allows the nation to start with a clean slate post the Hasan Ali and related episodes.